India is encouraging the use of its local digital payments network to facilitate loans, with a particular focus on enhancing credit access for underprivileged communities.
The National Payments Corporation of India (NPCI) has opened its infrastructure to banks for offering short-term financing to small and medium-sized enterprises (SMEs), such as vegetable sellers and street food vendors. NPCI asserts that the country holds a substantial untapped potential in credit provision, and it aims to use its Unified Payments Interface (UPI) to address this gap.
Benefits and risks of UPI
UPI enables quick transactions between bank accounts within India, competing with global payment giants like Visa in terms of transaction volumes. As part of the government’s broader digital ecosystem known as India Stack, this system allows Indians to verify their identities, access benefits, and make payments via mobile devices.
Bank account ownership has surged dramatically in the country, reaching 89% by 2024, according to the World Bank, as a result of efforts to direct cash transfers directly into low-income individuals’ accounts. However, 16% of these accounts remain inactive, compared with an average of 4% among other lower- and middle-income nations.
While users are accustomed to using UPI daily, the integration of credit services through this platform is still in its nascent stage. Now, banks can connect various types of loans—backed by assets like gold, property, deposits, shares, and mutual funds—to customers’ UPI applications. From late August onwards, these disbursed amounts can be utilized for merchant payments, peer-to-peer transfers, or cash withdrawals. During this transition period, banks will need to update their respective systems.
A key hurdle in this implementation is the low formal borrowing rate of only 15% among India’s population as of 2025; most potential customers tend to seek funding from friends or family. Although UPI provides the infrastructure for banks to deliver loans, credit evaluation and risk assessment will be managed by lenders themselves. Regulators are expected to oversee this process responsibly.
Notably, some resistance has emerged against mandatory usage of UPI by small businesses. Several Indian states are mandating that SMEs provide UPI sales data as part of their tax registration efforts, which has generated controversy. In cities like Bengaluru, many market vendors have refused to accept UPI payments.
